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The mining sector is currently undergoing transformation through issues like enhanced safety, cost-cutting, enhanced productivity as well as ESG goals but to achieve some of these objectives, the industry is adopting industry trends to improve sustainability, efficiency, and accountability while reducing risks and costs. Given the current challenging economy, it is essential that companies keep abreast of sustainability trends as they evolve and understand the direct impact on their business performance to remain competitive. As the world is fighting to go green, the increasing risk of environmental, social and governance (ESG)-related litigation in 2023, including over sustainability disclosure, is another challenge for companies and investors to navigate. Climate change, biodiversity and some other nature-related topics have also dominated stakeholder discussions and some stakeholders had several partnerships, made policies aiming to counter climate change. These and other key sustainability trends which will be mentioned in the article are expected to impact a wide range of mining stakeholders as far as global mining is concerned.
Climate strategies to be reconsidered in the face of energy security and affordability concerns
In 2022 after Russia’s invasion of Ukraine, the war has sparked an energy crisis globally and the prices for both oil and gas rose. It then becomes a challenge to achieve the Paris Agreement goal to limit global warming to 1.5 degrees to 2 degrees Celsius as expected hence companies should consider balancing energy security, affordability and the energy transition in a context of high inflation and rising interest rates. Corporates investing in their own energy generation may find projects cost more in the short term. But while the costs of deploying solar have increased, these should start declining and have been relatively small compared to European natural gas price increases, which according to the S&P Global Report (2023) have risen nearly eight times higher over the past two years. USA policy makers have formulated the US Inflation Reduction Act- a transformative law that is helping the United States meet its climate goals and strengthen energy security. It was signed into a law a year ago and since its inception last year, the private sector has announced more than $110 billion in new clean energy manufacturing investments, including more than $70 billion in the electric vehicle (EV) supply chain and more than $10 billion in solar manufacturing. The sector also announced approximately $240 billion in new clean energy manufacturing investments so far. According to the US Department of Energy, they estimated that the Inflation Reduction Act and Bipartisan Infrastructure Law will lead to greenhouse gas emissions reductions of approximately 1 billion tons in 2030.
Additionally, Europe also put forward the REPowerEU plan in May last year to support the ambitious EU goal of achieving at least -55% net greenhouse gas emissions by 2030 and climate neutrality by 2050 in line with the European Green Deal. The plan is an implementation by Europe to reduce its dependence on Russian fossil fuels and accelerate the green transition, by saving energy, investing in renewables and diversifying energy supplies. Otherwise, if emissions continue to rise, meeting the COP21 goals could entail greater and more costly decarbonization efforts.
The rising costs from physical climate risks will accelerate investments in adaptation and resilience
Climate-change risks are mounting, and with them there is need to advance on adaptation and resilience. Physical climate risks are unevenly distributed across countries and regions, and over time and across the business value chain, physical climate risks can have direct impacts, like impairment costs and productivity loss, and indirect impacts that can disrupt supply and demand. All of these can have an impact to the investor, such as a change in earnings or an increase in default risk. All stakeholders will bear the impacts from physical risks related to climate change. An agreement reached at the U.N. climate change conference, known as COP27, for a “loss and damage” fund will seek to address adaptation and resilience challenges of developing countries. According to the World Metrological Organization statics,” Over the past 50 years, there were more than 11 000 reported weather, climate and water-related disasters, resulting in just over 2 million deaths and US$ 3.64 trillion in economic losses. That breaks down to a daily global average of 115 deaths and US$ 202 million in economic losses.” However, to counter this, in 2023 stakeholders should pay more attention to adaptation and resilience financing. Finance is critical to accelerating climate adaptation, but flows remain far short of what is needed given escalating climate risks. Many international players including the World Bank called on the diversification of instruments used to deliver climate finance, including an increased up of policy-based finance to complement the majority-share project-based financing. With that said, developing countries can only sustain so much debt to finance rising losses and lost revenues from physical climate risks.
Climate change will continue to drive drought and water scarcity, sharpening the focus on water-related risks
Climate change is driving water scarcity and more severe and frequent droughts, hampering agricultural production, food supplies and economies. SDG Report (2022) said that “About two billion people worldwide don’t have access to safe drinking water today and roughly half of the world’s population is experiencing severe water scarcity for at least part of the year. These numbers are expected to increase, exacerbated by climate change”. The World Food Programme also reported that, since 2019, the number of people affected by food shortages has more than doubled to 345 million, roughly 4% of the world population, from 135 million. Drought has impacted major economies like Europe, the U.S. and China, raising prices and creating potential food shortages that excessively impact the world’s most vulnerable communities. Bearing this in mind, more investors and companies will seek to assess the social and financial costs associated with water scarcity and droughts. Some sectors, including utilities, oil and gas, and agribusiness, are more exposed to water stress than others and will face greater operating and financial challenges. UN 2023 Water Conference affirmed that as of 30 March 2023, more than 700 voluntary commitments have been summarized in the Water Action Agenda, which is key to achieving Sustainable Development Goal 6 (clean water and sanitation) by 2030. Pledges made during the Conference have a direct financial implication exceeding $330 billion, with the potential to leverage close to $1 trillion worth of services for humanity and nature.
Understanding of biodiversity and nature-related risks will reach an inflection point as more data and frameworks become available
After COP27 and COP15 held in November last year, the events clearly showed that economies and nature are interconnected. Valuable flows of goods and ecosystem services support economic growth and human wellbeing. Despite this, biodiversity, essential to sustaining natural capital and ecosystem services is declining hence its loss will lead to absent transformative changes to economies. Following that, stakeholders should clearly look to factor biodiversity-related risks and opportunities into decision-making in 2023.
EU has a new regulation that if some companies follow, they might have to better understand biodiversity risk and how to compact it. The EU’s biodiversity strategy for 2030 is a comprehensive, ambitious and long-term plan to protect nature and reverse the degradation of ecosystems. The strategy aims to put Europe’s biodiversity on a path to recovery by 2030 and contains specific actions and commitments. As part of this plan, the Commission proposed the EU’s first ever Nature Restoration Law which includes an overarching restoration objective for the long-term recovery of nature in the EU’s land and sea areas, with binding restoration targets for specific habitats and species. Some regulators and central banks have already made the case as to why and how financial institutions should respond to rising risks and biodiversity losses. We believe that these initiatives, among others, will serve as catalysts for greater reflection by stakeholders about the impact, risks and opportunities associated with nature and biodiversity.
Sustainability disclosure standards will pressure companies and investors to respond and adapt.
Last year various proposals for disclosure standards relating to sustainability related issues were drafted with the aim to enhance transparency and consistency on sustainability-related issues and mitigate the risk of misrepresentation, perceived as greenwashing, in financial markets. Some of these boards who had draft these proposals include the European Financial Reporting Advisory Group the U.S. Securities and Exchange Commission (SEC) and International Sustainability Standards Board. However, some of the proposals face criticism because of their complication and a continuing lack of global alignment for they all use the TCFD framework as a reference for climate-related issues, but differences remain in their specific requirements and how they treat wider sustainability issues. In 2023, we believe companies and investors will have to prepare for reporting under several new and complex sustainability disclosure standards and adapt as they continue to evolve.
Companies and investors will navigate the increasing risk of litigation related to sustainability actions.
The efforts to incorporate ESG into corporate policies and investment decisions has faced diverging pressures since last year as witnessed by an increasing number of climate-related against corporates. The Global Climate Litigation Report (2023) shows that people are increasingly turning to the courts to combat the climate crisis. As of December 2022, there have been 2,180 climate-related cases filed in 65 jurisdictions, including international and regional courts, tribunals, quasi-judicial bodies, or other adjudicatory bodies, such as Special Procedures at the United Nations and arbitration tribunals. Against this background, we anticipate that companies and investors should be tested on the strength and depth of their sustainability commitments and the priorities they support considering a growing risk of ESG-related litigation. Investors should increasingly check to see if companies are backing their words with actions, particularly on climate change. Therefore, companies may face more inspection on appropriate board oversight and the maturity of their sustainability strategies and processes.
Employment practices adapting to new workforce dynamics will be tested in the face of economic and labor-market uncertainty.
Many companies introduced new incentive structures, benefits, workplace culture initiatives just after COVID-19 and career development opportunities to promote the employee experience and better attract and retain talent. Promoting a strong employee experience like that can contribute to sustained competitiveness over the long term. Workers increasingly demonstrate willingness to adjust the time and effort they dedicate to their job or leave their positions for new opportunities if workplace culture does not align with their values and expectations. Due to economic conditions, if the economy continues to deteriorate and labor market resilience decreases, companies may face calls from investors to scale back more progressive workplace practices. However, companies and investors in 2023, should have their employee-friendly workplace practices be tested.
More resources will be devoted to managing human rights impacts in supply chains amid new sustainability regulations.
Despite of geopolitical conflicts, inflation and the effects of climate change on supply chain operators continue companies should invest more resources into managing the resilience and sustainability of their supply chains in the face of a more demanding regulatory landscape governing corporate responsibility around the impact on human rights. Germany has passed a law called German Supply Chain Due Diligence Act- it allows prosecutors to impose fines of up to 2% of firms’ global turnover if they fail to identify and prevent human rights and environmental impacts in their supply chains, applies to companies with a registered office or principal place of business in Germany, as well as foreign companies with a branch office there. It currently impacts companies with at least 3,000 employees, but from 2024, it will apply to those with just 1,000 workers. Although the act does not give rise to any new liability under civil law, it is expected to prompt non-governmental organisations to more readily file lawsuits for alleged human rights violations in German courts. In addition to more substantial legal, operational, reputational and financial consequences of violations, companies may need to consider costs associated with adapting their sourcing models and managing higher input and production prices.
The global sustainable bond market will return to growth but contend with credibility challenges and market uncertainty.
The global green, social, sustainability and sustainability-linked bond (GSSSB) market in 2022 didn’t perform as expected in 2021 as rising interest rates and the risk of recession in many parts of the world sidelined debt issuers. Sustainability-linked bond issuance fell sharply over the second half of 2022 as investors raised concerns about issuer ambitions and incentives to achieve sustainability targets. These instruments will have to increasingly address investor questions about the effectiveness of targets and incentives, However, in 2023, GSSSB issuance has grown to $1 trillion in 2023 compared to nearly $850 billion in 2022 as the asset class. GSSSB asset class remains an important tool to help drive investment in meeting climate and sustainability goals, and issuers and investors are keen to utilize the tools. Take for example, the Inflation Reduction Act, which was passed in the U.S. in August 2022, this is already driving issuance hence the impact on investor demand and issuer appetite for GSSSB from sustainability-related policies, regulations and transparency initiatives like these is likely to gather pace globally over the next few years.